Download Financial Financial Systemic Risk Management Systemic Risk Management Korea’s Experiences

G20 Conference on
Financial Systemic Risk
(September 27-28, 2012, Istanbul, Turkey)
Financial Systemic Risk Management
Korea’s Experiences
Jun Il Kim
Bank of Korea
I. Systemic Risks of Korea
Key Characteristics
Time-varying risks (financial pro-cyclicality) proven
more important than cross-sectional risks
Triggering shocks are largely of external origin
(e.g., global financial stress, capital flow volatility)
Risks are in the private sector and not in the pubic
sector (with strong fiscal soundness and credible
central bank)
Domestic risks are building up (household debt)
Procyclical and Volatile Capital Flows (1/2)
Capital volatility a dominant systemic risk factor in
EMEs, and housing prices and credit volatility in AEs
(IMF, Global Financial Stability Report, April 2011)
Capital Inflows to Asia
& GDP Growth
14
(%)
(%) 40
30
GDP growth (RHS)
10
4
(%)
Housing Prices in Seoul
& GDP Growth
10 15
(%)
(%) 30
GDP Growth (LHS)
35
Capital inflows/GDP(LHS)
12
Capital Inflows to Korea
& GDP Growth
5
2
10
25
8
20
6
15
0
2
5
10
0
0
GDP Growth (RHS)
-2
10
5
20
0
-5
4
Housing Prices(Seoul,
RHS)
-10
Net Capital
Flow/GDP (LHS)
-4
-15
0
0
-5 -6
01
03
05
07
Source: BOK staff Calculation
09
11
00
02
04
06
08
10
-20 -5
-10
00
02
04
06
08
Source: BOK, Kookmin Bank
10
Procyclical and Volatile Capital Flows (2/2)
Financial Market Volatilities
(std. dev*)
Capital Flows
250
(Billion dollars)
221.9
Short-term debt
Bond
200
140
Won/Dollar FX rate (LHS)
KOSPI (LHS)
Treasury Bond Yield (3Y, RHS)
A
120
Equity
C
0.30
B
100
150
0.35
0.25
101.6
100
80
0.20
50
60
0.15
0
40
0.10
-12.6
20
0.05
C
11.7~11.12
0
-50
-21.4
-69.6
-100
A
97.11~98.3
B
98.4~08.8 08.9~08.12 09.1~11.6
(EA Fiscal Crisis)
(Asian Crisis) (Lehman Crisis)
Source: BOK staff calculation
0.00
97
99
01
03
* 3-month moving averages
05
07
09
11
External Vulnerabilities Prior to GFC
Over-hedging and ST Debt
(Billion dollars)
Net FX liabilities of Banks
Short-term external
Shortdebts of foreign
exchange banks
140
120
(Billion dollars)
Foreign branches
Domestic banks
120
100
100
80
140
Net forward selling
of companies
80
60
60
40
40
20
20
0
0
03
04
05
06
07
08
09
10
11
95
97
99
01
03
05
07
09
11
Build-up of Household Debt (1/4)
Household leverage at historical peak
Variable interest rate mortgages (93%)
Interest only paid, No Principal (78%)
Household debt-todisposable income
155%
Mortgage Loans,
by Interest Rate Type1)
Mixed Rate
2.4%
Fixed Rate
4.9%
Floating
Rate
92.7%
129%
2005 2006 2007 2008 2009 2010
Source : Bank of Korea
Source : Bank of Korea
Note: 1) As of end-June 2011
Mortgage Loans, by
Repayment Type
Installment
Repayment Loans on
which principal
currently being repaid,
21.6%
Installment
Repayment
Loans currently
in grace period,
Bullet Repayment 41.1%
Loans,, 37.3%
Loans
Source: Seoul metropolitan area home
mortgage loan data of 4 major
banks
Build-up of Household Debt (2/4)
Increased financial access by households since AC
Housing boom (albeit milder than observed in AEs)
Steady decline in interest rate (and inflation)
Household Debt to Disposable Income
House Price : Selected Countries
300
300 190
(2000Q1=100)
Korea
US
France
UK
Ireland
250
200
(%)
Korea
US
UK
Japan
250
160
200
130
150
150
100
100
50
50
2000
2002
2004
Source : Bank of Korea
2006
2008
2010
100
70
2004
2005
2006
Source : Bank of Korea
2007
2008
2009
2010
Build-up of Household Debt (3/4)
Housing boom of 2005-08 driven by credit cycle
(with cumulated price increase of more than 30%)
Housing Price Index
(Seoul metropolitan area)
120
Housing Prices & Household
Debt Growth Rates1)
12
(2011.6=100)
(%)
(%)
12
110
10
8
8
4
6
0
100
90
80
70
Household Loans (LHS)
Housing Price (RHS)
60
2004
2005
2006
2007
2008
2009
2010
2011
2012
4
-4
2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: 1) Year-on-year
Build-up of Household Debt (4/4)
Steady decline in interest rates in the 2000s amid
rising prime-age population
Bank and Non-bank Deposit Rates
20 (%)
Demographic change
Bank Time Deposit (5yrs)
Mutual Credit Companies Time Deposit (1yr)
Mutual Savings Bank Time Deposit (1yr)
Credit Unio Time Deposit (1yr)
Bank Time Deposit (6months-1yr less)
18
16
14
30%
25%
20%
12
10
15%
8
10%
6
Population Aged 40~54
4
5%
2
0%
0
1998
2000
2002
2004
2006
2008
2010
2012
1990
1995
2000
2005
2010
2015
2020
2025
2030
II. Macroprudential Policy
Responses
Addressing Capital Flow Volatility (1/2)
FX derivatives positions of banks
250
(%)
200
150
100
Currency Mismatches of Banks
(billion won) 50 90 (Billion dollars)
Scale of FX Derivatives Position of Domestic Banks(RHS)
domestic banks
45 80
Scale of FX Derivatives Position of Foreign Branches(RHS)
foreign bank branches
40
FX Derivatives ratios of Domestic Banks(LHS)
70
FX Derivatives ratios of Foreign Branches(LHS)
35
60
30
50
25
40
20
15
30
Implementation
(Oct. 10)
10 20
50
0
10.6
9
11
11.1
3
5
7
9
11
5
10
0
0
Announcement
(Jun. 10)
09.1Q
10.1Q
Ceiling cut
(Jul.11)
11.1Q
Addressing Household Leverage (1/2)
LTV and DTI Regulations: 2003-11
LTV Ratios: A Comparison
140 (%)
LTV
Jun-2003
50~60%
Oct-2003
40~60%
Mar-2004
50~70%
Aug-2005
DTI
100
80
40%
40~70%
Jul-2009
50~70%
40
Apr-2010
50%
Sep-2010
Temporary de-regulation
Apr-2011
Re-regulated
80
75
61
60
Sep-2006
116
120
20
0
75
74
64
47
Addressing Household Leverage (2/2)
Housing Indicators (Seoul area) Before and After Regulatory Tightening1)
Mortgage loans2)
House prices3)
Housing transactions4)
1) Comparison between six-month periods before and after strengthening of loan regulations
2) In trillions of won 3) Apartment basis 4) In units of 10,000
* Source: Bank of Korea
III. Macroprudential Policy
Framework
Financial Stability Policy Framework
ExEx-ante Prevention
Macroprudential Policy
Financial Services Commission (FSC)
Financial Supervisory Service (FSS)
Bank of Korea
ExEx-post Resolution
Crisis Management
BOK: Lender of Last Resort
Korea Deposit Insurance
Corp. (KDIC): Deposit
Insurance and Resolution of FIs
Microprudential Policy
Financial Services Commission
(FSC)
Financial Supervisory Service (FSS)
Ministry of Strategy &
Finance (MOSF): FX Policies
and BailBail-out
Amendment of BOK Act (31 Aug, 2011)
Financial Stability Mandate ReRe-introduced
Assessment of Systemic Risk & starting point of Financial Stability Policy Framework
Enhanced Access to Microprudential Data
Amended Act mandates BOK Access to
B/S info of both Banks and Non-Bank FIs
MOU with FSS allowing BOK to Access
Wider Range of Microprudential Data
Greater Accountability for Financial Stability
Semiannual Report on Financial Stability (FSR) to National Assembly
Greater Role in Addressing Systemic Risk
Systemic Risk Assessment Model of BOK
BOK SAMP
Nonlinear disequilibrium model to capture tail
risks and feedback/threshold effects
Integrated framework to reflect procyclicality and
interconnectedness
Macro stress test platform
Evaluate policy effectiveness
Test vulnerabilities of individual banks
Structure of BOK SAMP: Six Modules
① Macro module
③ Contagion loss
module
⑥ Systemic risk
module
⑤ Multi period
module
Default
contagion loss
Macro risk
factors
Fundamental
loss
Liquidity
contagion loss
Expected
loss
Systemic Risk
Indicators
Expected
Shortfall
② Bank loss
module
THE BANK OF KOREA
④ Liquidity risk
module
Value at
Risk
Systemic
Crisis
Probability
12
Systemic Risk Indicators from BOK SAMP
(%)
Expected Asset Loss Rate
(%)
2.5
2
Expected Shortfall of Asset Losses
35
3
Liquidity Contagion
Loss Contagion
Fundamental Loss
30
25
Liquidity Contagion
Loss Contagion
Fundamental Loss
20
1.5
15
1
10
0.5
0
2006
(%)
5
2007
2008
2009
2010
Expected Ratio of Distressed Banks
25
20
Liquidity Contagion
Loss Contagion
Fundamental Loss
0
2006
(%)
2007
2008
2009
2010
Probability of Systemic Crisis
4
3
Liquidity Contagion
Loss Contagion
Fundamental Loss
15
2
10
1
5
0
2006
2007
2008
2009
2010
0
2006
2007
2008
2009
2010
IV. Policy Issues
Circumventions and Unintended Side Effects
Circumventions: “3 years + 1month” mortgages
offered when LTV or DTI applied to mortgages with
maturity of 3 years or less
Asymmetric effects: LTV or DTI is counter-cyclical
during housing boom but pro-cyclical during
downturn
Balloon effects: Non-banks tend to increase
mortgage loans when LTV or DTI applied only to
banks
Coordination and Data Gaps
Two macroprudential authorities (BOK and
FSC/FSS) with no clear formal mechanism for
policy coordination
Communication with fiscal authority
BOK: improved but yet no full access to needed
data (e.g., limited access to non-banks)
Data gap is substantial (e.g., limited availability of
sufficiently granular data for SAMP)
Thank you!